Audit Roundup: WSJ on “Tough Guy” Paulson

A little over-dramatic; NYT says watch your shrinking paycheck; etc.

The Times and the Journal post their behind-the-scenes stories of the meeting where the government told the nation’s top bankers it would be buying part of their companies to give them needed capital.

The Journal for a second day goes with the “Henry Paulson got tough” angle, saying the Treasury Secretary forced the bankers to “blink.” This seems like overreaching to find a narrative—as if the banks were going to turn down this money at just 5 percent interest.

Indeed in its story yesterday the Journal said the banks had proposed just such a deal this summer. But now, with the crisis threatening to take them all down with us, they had to be dragged along? Unlikely.

Senior executives and advisers to some of the nation’s leading banks pitched such a plan at various points earlier this summer but were rebuffed by officials at Treasury and the Fed, according to people familiar with the matter. Instead, Treasury initially marched ahead with a plan to buy distressed assets directly from banks.

In the department of unnecessary detail, the WSJ reports that the bankers lunched on sandwiches from Potbelly Sandwich Works. Thanks for that. It doesn’t tell us, like the Times does, that the plan is a $2.25 trillion commitment, more than triple the controversial $700 billion original bailout package.

“Everything the government has done is not going to prevent further deterioration in the economy,” said Stuart Hoffman, chief economist at PNC Bank. “At the end of all this, what matters is what the economy does.”

And the paper’s David Leonhardt writes a must-read about the severity of income stagnation and impending decline, which will likely be the worst period since the Depression.

every recent recession has brought an effective pay cut of somewhere between 3 and 7 percent for the typical family. The drop typically happens over a period of about three years, lasting longer than the recession officially does, as pay fails to keep up with inflation.

The recent turmoil — the freezing up of credit markets, the fall in stock markets, the acceleration of layoffs — has made it unlikely that the coming recession will be a particularly mild one.

“The biggest hit will be in 2009,” Nariman Behravesh, the chief economist of Global Insight, a research and forecasting firm, told me, “and it probably won’t be until 2011 until we see any kind of pay gains.”

What will make this recession different, no matter how deep or shallow it is, is that it’s following an expansion in which most families received little or no raise. The median household made $50,200 last year, slightly less than the $50,600 that the equivalent household earned in 2000, according to the Census Bureau. That’s the first time on record that income failed to set a new record in an economic expansion.

Pass it on.

The Washington Postreports in-depth on how a bid by a Clinton Administration official to regulate credit-default swaps a decade ago was nipped in the bud by Alan Greenspan and other Clinton officials. More on this later today.

Martin Wolf of the FTsays the recent moves by governments around the world should calm the panic. But he raises two key questions:

…first, worry may shift from the creditworthiness of banks to that of governments; second, economies may weaken far more profoundly than policymakers believe. These risks are real, but containable.

Mind you, Wolf is one of the smartest commentators out there, and he raises the prospect that banks might need another $1.5 trillion in capital:

Against this, four concerns must be registered: first, additional losses are likely on already contracted domestic European mortgage debt and as a result of the economic slowdown under way; second, countries with exceptionally large banking systems and exceptionally high domestic indebtedness may find fiscal burdens far heavier; third, the banking sector also needs extra capital, to offset the collapse of the so-called “shadow” banking sector; and, finally, the sector also needs to be substantially better capitalised.

Informed observers suggest an additional $1,500bn in capital might be needed for such reasons. So double this and assume it all comes from the state: it would still “only” be 10 per cent of US and European GDP. If the real interest rate were 2 per cent, this would be a permanent increase in public spending of 0.2 per cent of GDP.

Moreover, this would not be extra demand for resources. It would be a recognition of past errors: a part of what people thought was private lending turned out to be public spending. Stuff indeed happens!

I like to see reporters and editors using plain language to call it like it is instead of hiding behind “neutral” wiggle words that allow them to avoid responsibility—and for readers to miss the point. So, a tip of the hat to Bloomberg for calling a spade a spade, that the government may directly subsidize GE, Citigroup, and others:

he Federal Reserve may subsidize America’s companies by purchasing their short-term debt at rates below those demanded by private investors in the $1.6 trillion commercial-paper market.

The Journal takes a nice look at the end of an era on Wall Street, with punctured egos and bank accounts deflating the one-time “Masters of the Universe.”

Mike Holland, a money manager at Holland & Co., a New York investment firm, compares the current environment to the 1970s, when the “go-go” era of the 1960s was followed by rising inflation and interest rates. Stock-market returns suffered.

“The gilded age of the early 21st century is coming to a close,” Mr. Holland said. The next decade, he said, will see fewer “houses in the Hamptons, yachts and soirees in Sardinia,” reducing “the allure of Wall Street and the whole investment business.”

Mr. Solomon, 70 years old, started on Wall Street at Lehman Brothers in 1960 when the firm occupied a smallish 12-story building and the entire investment-banking department occupied a single floor. “We bought our own lunches and we took the subway,” he said.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.

Don't Miss

The Washington Post’s November 24 report checked all the boxes: “The flood of ‘fake news’ this election season got support from a sophisticated Russian propaganda campaign,” it began. Not only had American voters been influenced by a deliberate...